Businesses Gear Up for Changing Tax Laws in 2017

CPA Craig Savell’s phone has been ringing since the election. He often advises manufacturing firms in New York City and throughout the East Coast with $100 million in revenue or more. They want to know what Trump’s tax reform agenda will mean for their companies.

“They’re asking to understand the impact on their business operations and, most notably, what the tax implications are going to be under the Trump plan,” said Savell, an accounting and audit partner at Margolin, Winer & Evens, LLP (MWE), a CPA and advisory firm with offices in New York City and Garden City, Long Island. “As it relates to cash flows, there is definitely an impression that the Trump election should be favorable to business. They are looking for opportunities in terms of cash flows: less taxes, less restriction and an overall more positive borrowing environment.”

But advising businesses will not be easy in the coming weeks, given that Trump has not yet offered many details about what he has in store. “There will be tremendous uncertainty as to how tax policy and even regulatory policy is going to affect businesses in the city and their owners on the personal tax side,” said Marc Newman, association managing partner at Anchin Block & Anchin. “That has given us a lot more interaction and an opportunity to work closely with our clients. It’s going to keep us a lot busier in the next year.”

Here are some of the major changes that could be ahead for the business community, if Trump is able to implement them.

A lower corporate tax rate: One of the most important changes Trump has proposed is to lower the corporate tax rate from 35% to 15%. “The idea of lowering the corporate rate is long overdue,” said CPA David Lifson, a federal tax services partner at Crowe Horwath in Manhattan. “It is the highest of all industrialized nations by a large margin.”

Flow-through entities such as LLCs and S corps, which are taxed at the owner’s individual tax rate, would also be taxed at 15%, under Trump’s proposal. That would represent a significant tax reduction for more affluent owners, who pay as much as 39.6%.

But accountants are still in the dark about exactly how the law will apply. “There needs be clearer language about what this means for flow-through business taxes,” said CPA Jonah Gruda, a tax partner at WeiserMazars.

One subject that needs more discussion is the impact of a lower corporate tax rate on the deferred assets many corporations keep on their balance sheets, said Frank Kurre, Grant Thornton’s Metro New York and New England managing partner. If, for example, a corporation is carrying forward a net operating loss on its books and the corporate tax rate goes down, the value of that asset will decline and that asset will need to be written down, Kurre explains. That will result in an expense that hits the company’s balance sheet as soon as new tax laws go into effect.

“Whatever they are carrying as a deferred tax asset will not be worth what it is today,” said Kurre. “That will have a significant P&L impact early on.”

Fewer deductions. Trump has also suggested reducing or eliminating tax loopholes that benefit special interests, and deductions that will become redundant or unnecessary if the corporate tax rate dips. Although he hasn’t been more specific, many firms are urging business clients to take all of the deductions they can in 2016.

“Companies are looking at bonus deductions,” said Kate Barton, EY Americas’ vice chair of tax. “We are suggesting they make sure they are paying their bonuses on time to get them deducted in the current year. Making sure all compensation is paid by year-end is also important. There are pension payments, as well. They should make sure everything they can deduct is deductible by year’s end.”

Trump’s website notes that he will preserve the R&D credit, which is welcome news to many firms. “There are a lot of clients who take advantage of the Research and Development credit,” said Savelle. “That encourages them to develop new products or processes.”

Immediate expensing of all new business investments. Under Trump’s proposals, manufacturing firms will have the option of expensing capital equipment right away, instead of taking a deduction for interest expenses, or possibly accelerating their depreciation. Elections will only be revocable once, within the first three years after they are made.

“The benefit of being able to expense some of these things is you can take a tax deduction now,” said Kurre. Otherwise, capital expenditures are typically depreciated over many years and not expensed in the year they are incurred, unless they qualify for what is known as the Section 179 deduction.

Elimination of the corporate Alternative Minimum Tax (AMT).Many taxpayers know there is an AMT for individual taxpayers, but, notes Gruda, “there is a corporate AMT as well.” The corporate AMT was put into place in 1986 to make sure corporations didn’t overuse deductions to reduce or eliminate their tax liability. The law has generated considerable criticism over the years because of the complexity of complying with it, and there have been many calls to repeal it. Critics may get their wish. In the policies listed on his website, Trump has said he will eliminate the corporate AMT.

Repatriation of corporate cash parked overseas. Trump has proposed a repatriation of corporate profits held offshore at a one-time tax rate of 10% on his website. “If you have money invested in Hong Kong, for instance, if you bring that money back into the U.S., there will be a significant tax on that,” said Kurre. “What could possibly happen is they allow for significant tax reduction.”

Currently, money that corporations repatriate is subject to a 40% tax rate, notes CPA Jeffrey Cohen, partner-in-charge of tax services at Grassi & Co., an accounting firm with an office in New York City. “You’ll be able to bring the profits back to the U.S.,” says Cohen. “If you build a manufacturing facility in U.S. you will have a chance to write off entire facility if you agree not to deduct the interest payments on the debt.”

Funds that are repatriated would generate billions of dollars in tax revenue, which could be used for infrastructure repairs, noted Kurre. “If they go with significant infrastructure rebuilding, then you are talking about billions of dollars being invested in roads and bridges,” he said. “You’d also see a significant increase in defense spending.”

For now, though, accountants are waiting for more information. “Professionals and advisers are all reviewing the proposals on Trump’s website and are working with clients to discuss potential implications and opportunities,” said Savell.

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